On the surface, there wasn’t much to like about today’s inventory data out of the Energy Information Administration (EIA). Crude oil supplies rose by another 8.4 million barrels, after increasing 7.7 million the week before. Supplies have now risen for seven straight weeks, to a level that’s far above the seasonal average.

But after briefly spiking lower on the news, oil prices stabilized. Then they turned tentatively higher … before ripping a buck and a half into the close! Like a beach ball you try to hold underwater, crude oil (and energy stocks) keeps bouncing back to the surface after every bit of seemingly bearish news.

So what “crude realities” are the bears missing?

First, they’re forgetting about demand! The economic news here in the U.S. just keeps humming along. Gasoline demand has been running above year-ago levels since the tail end of 2014, as you can see in this chart from the EIA, while distillate demand is showing the same pattern.

Lousy news on the economy in Asia and Europe has offset that positive influence. But the news is getting better in both regions on the margin. That’s a message Saudi Arabia’s oil minister Ali Al-Naimi just underscored in comments overnight, adding that he foresees a more “calm” market rather than further sharp declines.

Given the encouraging demand picture, it’s hard to see inventories of refined products climbing sharply. But it’s easy to expect them to decline further. Sure enough, gasoline and heating oil futures just rose to their highest levels since early December — a fact the bears on CNBC conveniently forget to mention when talking about crude!

Finally, they’re not paying enough attention to currencies! The relentless rise in the U.S. dollar has coincided with declines in the commodities market, including oil. But the euro hasn’t made a new low in the last month. The Australian and New Zealand dollars just rose to their highest levels since mid-January, while the British pound just hit its highest since the first trading day of 2015.

“Energy stocks are the cheapest, most attractive they’ve looked since the mid-1980s.”

And even if I’m not, let’s face it. Energy stocks are the cheapest, most attractive they’ve looked since the mid-1980s. They’ve already been pummeled, with any froth wrung out of them. That means the downside risk looks very limited, while the upside potential looks huge.

Invest accordingly!

Now let me hear your take. What do you think about overseas and domestic demand? Is it enough to absorb the excess supply we have out there? Or do you think we’re just swimming in too much oil? Will the dollar have an impact on crude, and if so, what kind? Here’s the link to the Money and Markets website again. Don’t be shy!

Our Readers Speak

Janet Yellen and the future direction of interest rates were the big topic at the website yesterday, in light of the Federal Reserve Chairman’s testimony before the Senate (followed up by comments before the House today). Interpretations of what she said and what will happen next varied widely.

Reader Tommr reminded everyone of a key Fed tenet: Policymakers usually follow the path already laid out by the longer end of the Treasury yield curve:

“I have contended for many years that the Federal Reserve does not set interest rates, with the possible exception of extremely short-term rates. It generally follows the rates set by the markets! So if the markets push rates up now, the Fed will follow suit and adjust its targets to conform!”

Reader Robert C. weighed in to say he doesn’t think the Fed will raise rates in 2015, for the following reasons:

“We are in our third currency war, which we started in 2010. In his State of the Union message, the President set a goal of doubling exports in five years. Every central banker who listened that night knew that we would devalue.

“But the rise in the dollar is due to capital inflows from Europe and the rest of the world. If interest rates were raised, it would make our exports more expensive abroad then what they already are. We are on the path of self destruction.”

Thanks for the observations. But it’s worth noting that the market is already raising rates. Take the 2-year Treasury yield, one of the points on the yield curve most sensitive to Fed expectations.

Despite all the Fed’s protests about interest rates, the yield on 2s bottomed out at just under 0.2 percent in May 2013 — and it has been rising steadily ever since! It’s currently around 0.6 percent, triple the level of a year and a half ago.

So you could easily make the case the markets don’t believe the Fed. Reader Steven pithily summed up the Fed’s increasing impotence this way: “As for the Fed’s influence upon the economy, it’s all over except for the Yellen!”

Then there was Reader David, who took issue with my characterization of past Fed actions. His view:

“You’ve been critical of the Fed for years now, but the fact is that the U.S. economy is doing better than anywhere else in the world, employment is growing, and the deficit is declining rapidly.

“Sure, not everything is peaches and cream, particularly middle class incomes. But that problem has been around for decades, not just since the crash. So things are going pretty well despite the Fed doing exactly the opposite of what you would have it do, and inflation hasn’t gone out of control as you and others had been predicting a few years ago. Did you ever think that maybe, just maybe, the Fed deserves a little bit of credit for the U.S. economy doing so well, and that perhaps they really know what they’re doing?”

My answer: Sorry, but no. I don’t think they deserve much credit for the current state of the U.S. economy, and no, I don’t think the Fed has a very firm grasp on the economy.

Fed policymakers from Alan Greenspan to Ben Bernanke to many of their compatriots and successors have repeatedly screwed up by keeping policy too easy over the past couple of decades. Their actions helped fuel the dot-com bubble indirectly … and directly contributed to the biggest housing bubble in U.S history.

Some of the things the Fed did during the crisis that they themselves helped create succeeded in stemming the bleeding in 2008-2009. But the economic recovery that followed the Great Recession occurred despite the Fed’s actions, not because of them.

Indeed, it’s natural for economies to gradually heal after devastating crashes. I contend that we would have seen ours recover regardless of whether or not the Fed bestowed hundreds of billions of dollars in free money on Goldman Sachs and other financial institutions.

Finally, all that QE-provided money from the Fed and its overseas counterparts is helping underwrite the very economic inequality that Yellen and her fellow policymakers claim they are so worried about. It does so by fueling asset price gains, which accrue to those with the most wealth, while doing little to improve wages and while impoverishing those who live off interest income.

And while we’re at it, that QE money has helped fuel the biggest bond market bubble in world history. We actually have negative interest rates in some locations — meaning lenders (bondholders) are now actually paying interest to borrowers (various governments and even corporations issuing bonds).

Bottom line? My view on the Fed comes down much more along the lines of Reader Herb, who said the following of Yellen: “That woman sounded like she had a mouth full of pudding and had very little idea of what she is doing. She does not instill any comfort from what she says and I believe she does not have a clue.”

Regardless of whether you agree with me, I appreciate hearing from you. So don’t forget to hit up the website and throw your hat in the ring on the Fed or any other topic!

Other Developments of the Day

“Janet Yellen Puts Fed on Path to Lift Rates” — That’s the headline the Wall Street Journal went with in the wake of her testimony before Congress yesterday. The only question is the precise timing, which depends on incoming economic data.

On the flip side, computer, printer, and corporate software and hardware giant Hewlett-Packard Co. (HPQ, Weiss Ratings: B+)laid an egg in its latest quarter. Revenue fell 5 percent to $26.8 billion, adjusted earnings per share barely budged from a year ago, and the forecast for future results left investors with a bad taste in their mouth.

Southwest Airlines (LUV, Weiss Ratings: A) didn’t conduct proper rudder inspections for more than 100 planes. But after scrambling and negotiating with the Federal Aviation Administration, it managed to keep flying rather than pull a fifth of its fleet offline while it conducted emergency catch-up checks.

Jurors found ex-Marine Eddie Ray Routh, who was charged with killing “American Sniper” Chris Kyle, guilty in a Texas court yesterday. The capital murder charge carries with it a sentence of life in prison without the possibility of parole.

Will the Department of Homeland Security get its funding? Many Republicans want to withhold money from the agency in order to force President Obama to roll back his immigration reforms. A Senate effort to break the logjam faces an uncertain outlook in the House, all ahead of the Friday deadline when DHS will run out of dough.

Want to weigh in on corporate earnings? The latest political squabble in Washington? Anything else in the news right now? Use the website as your outlet!

Until next time,

Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{38 comments }

Lee HuntWednesday, February 25, 2015 at 5:16 pm

Regarding projected oil prices a short term factor is the increasing potential for unilateral Israeli action regarding Iran’s nuclear activity. An attack by Israel is certainly growing more likely exponentially as the US dithers. Such an attack will immediately drive oil prices well beyond $120 per barrel. In addition, long term factor is the impact on low prices on OPEC producers who, at some point, must take action to raise prices to stop their bleeding and adverse impact on their bottom line.

Curry savageSunday, March 1, 2015 at 12:45 am

the Arabs want to bleed that’s the only way to control the young they like everyone else discovered that too much money destroys everyone. look for oil prices to continue down

joanWednesday, February 25, 2015 at 5:19 pm

Your outlook for crude is directly opposite to Edelson’s . who thinks it will go to 40 and then towards 30 before improving. How do subscribers reconcile this?

Chuck BurtonWednesday, February 25, 2015 at 8:11 pm

So Janet Yellen sounded like she had a mouth full of pudding and didn’t know what she was doing, hmm. Want to bet she does the wrong thing? Just the sort of person the bankers want in charge of things.

Chuck BurtonWednesday, February 25, 2015 at 8:16 pm

One thing good about Weiss: It doesn’t tell its people to all say the company view. They can be as independent as they choose to be. Read as many as you choose and make up your own mind.

RogerWednesday, February 25, 2015 at 5:20 pm

Oil will tank in the second half of the year. The dollar will go to103 thus driving all commodities lower. I am waiting to jump on the bandwagon for oil stocks. This is just the first half. The economy is not that good.

Oil & Russian SanctionsWednesday, February 25, 2015 at 5:20 pm

Peculiar, and coincidental how the “Oil Supply/Demand” story seemed to catch most everyone off guard in this era of data overload , while additional sanctions were being enforced on Russia, whose main source of income is energy !!!!! OIl Supply / Demand. or just an economic weapon !!!!

David CookeWednesday, February 25, 2015 at 5:25 pm

Just like to add one factor that seems to be overlooked at present. Yes, crude stocks are rising but, as you point out, distillate stocks are not. And a major part of the reason for this is the amount of US refinery capacity currently shut in by strike action and the like. Once that comes back on stream the distillate stocks will return while the crude stocks will start to be used up and disappear. Since most crude price analysts keep track of crude stocks but not of distillate stocks, they tend to miss this aspect.

BarryWednesday, February 25, 2015 at 5:44 pm

Lee I compliment you on your awareness of Israel action to be taking against Iran which will be in 2016. Iran here comes Israel in the about 16 months from January 2015.Watch for this… I will not take a shot at oil prices when that takes place I will let others do that.. Israel will not wait for help. They will not need it. March, March . March 2015 the stock market will have record jumps . With many talking about raising rates!!! Will not happen until The Halloweens Triple EVE ” Bloody Wednesday” October 28th..(Borrowed Words from Mike L.) Record Stock market drops in October. Will China be voted into the basket of funds(SDR’s) with the IMF in early October?? Get Ready ,Get Ready ,The Whirlwind Year 2015..

Chuck BurtonWednesday, February 25, 2015 at 8:42 pm

If the Renminbe isn’t part of the basket of funds, it will soon come to dominate it the way the Dollar has been doing until now.

Jim ReeseWednesday, February 25, 2015 at 5:51 pm

Of course, the Fed is doing what their bosses tell them to do…they are doing whatever the big banks say to do…. Why would them raise rates anyway, when they would have to pay interest on whatever amount they say they owe????

joanWednesday, February 25, 2015 at 7:01 pm

Not just the big banks. The servicing of the US debt would overwhelm the money avail;able for entitlements and defense If interest rates were at more normal levels. Financial repression will continue as long as Obama rules

Chuck BurtonWednesday, February 25, 2015 at 8:35 pm

Not just Obama, joan. As long as ANY professional politicians rule. Anarchy might almost be better than the systems we have put in place throughout this world. At least economies would be based on goods or services that had real value to people.

Jim ReeseWednesday, February 25, 2015 at 5:58 pm

By the way, I was Mayor of Odessa, Texas, for three terms….that is a town in the heart of the oil country of West Texas…about 100,000 people. Once you have lived through a few of these booms and busts in the oil business you begin to ignore them. Most of you can determine what you sell your product for….in the oil business, you cannot do so. That is set by the market…and by OPEC, since we agreed with the Saudis regarding pricing the sale of oil in dollars…the petrodollar. That will only last as long as the dollar remains the reserve currency of the world….which my be another five or so years…..,,,,

MuleWednesday, February 25, 2015 at 9:54 pm

Hey Jim; Were you there during the bust of the 80s. Everbody was so broke that they say the Odessa police arrested 3 “ladies” for prostitution and it turned out 2 of em were still virgins…(>:

RobertWednesday, February 25, 2015 at 6:11 pm

You are saying the opposite of what Larry Edelson is saying so Who do I believe??????
He is saying crude could drop below $30 a barrel.

Fred1Thursday, February 26, 2015 at 1:18 pm

Mike, I think you are wrong. Just based on the technicals……we have another big leg down that is due in OIL. And a lot of this is due to DEFLATION and war its effects on the world markets. Eventually this will change….but not soon as you seemingly predict….IMHO.

MikeyWednesday, February 25, 2015 at 6:24 pm

I agree with Joan and Robert – You are saying the exact opposite to what LE is saying, and not just on crude. That would appear to be a no-win situation when subscribing to newsletters. And, frustratingly, we never get a response to these comments.

FrederickWednesday, February 25, 2015 at 6:31 pm

Short squeeze. Stay short.

tommrWednesday, February 25, 2015 at 6:38 pm

I agree with reader Herb who said that Yellen it clueless. She is a pure accademic and has no understanding of the real world at all! I am a completely amateur economist and yet I seem to have a better grasp of what is happening!

joanWednesday, February 25, 2015 at 7:07 pm

She knows exactly what she is doing. With the unbelievable increase in US debt beginning with Bush years and escalating with Obama any significant increase in servicing the interest onUS debt would blow the budget for Obamaand earlier entitlements , and also Defense, off the page.

MuleWednesday, February 25, 2015 at 9:47 pm

The artificially low interest rates and printed out of thin air dollars are part of the wealth redistribution scheme, destroying the savings of the middle class.

tommrWednesday, February 25, 2015 at 6:46 pm

The conviction of Eddie Ray Routh for Capital Murder is an outrage and yet another example of the gross mistreatment of a person with mental illness! These people are constantly being vilified and punished for their affliction! It disgusts and sickens me!

Chuck BurtonWednesday, February 25, 2015 at 8:23 pm

The jury looked at all the evidence and decided Routh may have had PTSD, but he knew what he was doing, and knew it was wrong. That meant he was guilty under the law. If you think the law is wrong, then get it changed.

MuleWednesday, February 25, 2015 at 9:36 pm

Routh’s insanity was self inflicted chemical insanity and is no excuse before the law. May God Have Mercy on His Soul.

joanWednesday, February 25, 2015 at 7:08 pm

off topic. Go whine elsewhere

Arden LeimerWednesday, February 25, 2015 at 7:37 pm

Even if we do have a oil glut, cude may go down but because of government prices at the pump will keep going up. Since the low at $1.84 here in Nebraska, prices are now up to $2.23 and expected to reach 3.20 by end of April

JimWednesday, February 25, 2015 at 8:39 pm

The primary reason we have excess crude is the success of the shale oil producers. To the last man they have all slammed on the brakes to production expansion. US production will gradually level off and probably begin falling by summer. This should slowly but surely allow the oil price to recover. EOG,the undisputed leader of this group, has repeatedly stated it will modify future plans to shore up prices. OPEC could also surprise us at any moment with an emergency meeting. ISIS is another serious wild card. Stay long. Jim

JohnWednesday, February 25, 2015 at 8:52 pm

As long as Russa keep it up with not complying with the U.S. requests oil prices will stay low. The Petrol- Dollar is winning the battle between the U.S. and Russia as it always will. The consumers of the world the U.S. have spoken and U.S. allies have to much to lose by not doing what is asked of them= raising production to drive down Russin oil profits. Bam how do you like that one….????

Chuck BurtonWednesday, February 25, 2015 at 9:07 pm

Prices of commodities has been declining for some time. Many companies have begun to show greater profits as a result. This probably explains the generally rising stock markets to a large extent. I think prices of goods are starting to fall also, as a result, beginning with less processed goods such as food. When heavily processed items such as autos and aircraft begin to decline, you will know that deflation is well in hand. Keep your eyes open and avoid commodity investments for now.

Larry TWednesday, February 25, 2015 at 9:40 pm

I think we may be seeing the beginning of a deflationary period.. If it turns out that only
petroleum products are mainly the victim, I would think that it’s all like a “sponge-effect” and excess will be soaked up by increasing demand.

myron rabalaisWednesday, February 25, 2015 at 11:49 pm

This bear market in crude is very similar to the 1985-’86 collapse, both are supply driven. Like in ,86 crude declined 7 months and hit bottom, moved in a narrow trading range for a few weeks, broke out of this range to the upside for about 6 weeks, then declined and retested the lows. I think the same thing happens, as we are due for a rally soon, but will retest the lows in mid April, as spring brings warmer weather and a decline in heating oil demand. I don’t think the gasoline demand will rise any more until summer. This country is still producing a lot of crude oil

alThursday, February 26, 2015 at 12:35 am

Summer time demand prices r all ways up..for as interest rates go I’ve been invested for a year.it not going nowhere soon as I getc out. It will take off.ha.ha.my luck I’m in it I’ll stay with it .. one day I’ll make money….

John MarvinThursday, February 26, 2015 at 8:55 am

Mike – thanks for a great end of day review. I subscribe to several newsletters but I find yours to be balanced. Conservative and opportunistic.

Bob LewellynThursday, February 26, 2015 at 3:18 pm

The supply of oil in the USA has definitely increased as a result of the shale production in North Dakota and other places. As far as “swimming in a sea of oil,” this is somewhat of a flash in the pan because these new wells, while they are prolific producers, initially, seem to drop off from their initial potential in the first year or two. Some of them have fallen off as much as 60%. The new wells are great, but our national production will continue to drop and gradually the price of oil will reach new highs. The wrecks of the trains transporting crude oil may place some restrictions on the moving of crude oil. In addition, the veto by Obama of the Keystone Pipeline could have an effect on supplies.

David CookeSaturday, February 28, 2015 at 5:00 pm

In recent months there have been two spectacular, to put it mildly, crude oil fired rail infernos. I don’t know the total costs in terms of human life and monetary loss but any more of these and heads in the relevant administration departments will surely be endangered.

This in turn must mean that transport of crude in large quantities by rail will be curtailed. Since building pipelines takes a considerable time, several of the more recent production areas will be, at least temporarily, choked off. This will surely cause a decline in crude inventories and, in quite a short time scale, a rise in crude prices.